Oil Storage is filling fast - April 15

[dan_s]

This week's petroleum inventories update was bearish relative to consensus. "Big Three" petroleum inventories (crude, gasoline, distillates — including SPR) built by 30.4 MMBbls, versus consensus estimates calling for a build of 22.1 MMBbls and a seasonal draw of 0.1 MMBbls. Turning to crude, total inventories built 19.2 MMBbls, versus consensus calling for a build of 12.8 MMBbls and a normal seasonal build of 2.3 MMBbls. Refinery utilization fell to 69.1% from 75.6% last week, the lowest since July 2008. Total petroleum imports were 7.5 MMBbls per day, down from last week’s 7.9 MMBbls per day. Total petroleum product demand decreased 4.5% after last week’s 19.1% decrease. On a four-week moving average basis, there is a 18.5% y/y decrease in total demand.

While the “largest-ever oil supply cut” makes for good headlines, the reality of the newly announced OPEC+Russia deal still falls short of balancing the oil market in the near term. Part of the issue is that we predict only about half of the official cuts will actually materialize. More importantly, the extraordinary scale of the COVID-related disruptions in transportation and economic activity is such that even (hypothetically) full compliance would still not be enough. We estimate that, during the current quarter, 20 million bpd (or 20%) of global demand is being effectively erased. With close to three billion people around the world covered by lockdowns/stay-at-home orders,the impact on oil demand is vastly more severe than during the global financial crisis. Needless to say, the timing of improvement in demand, enabled by the easing of lockdowns and broader economic normalization, will largely be a function of medical and public health developments vis-a-vis the virus. Following the epic sell-off, the 12-month futures strip ($33.54/Bbl for WTI and $38.03/Bbl for Brent) is showing meaningful contango. Several key question marks remain: 1) on the bullish side, the possibility of supply disruptions above and beyond the current ones, including but not limited to Iran, and 2) on the bearish side, the massive uncertainties surrounding the duration of the pandemic’s demand impact.